The Garrulous Jay – Prisoners Of Geography

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Tim Marshall’s book, Prisoners Of Geography, is a fascinating exploration of the ways in which the physical world around us has shaped human history and will continue to do so in the future. I also think it contains an implicit critique of the way in which fund managers have tended to divide the world up.

In Marshall’s book he shows readers how seas, mountain ranges, deserts and rivers drive politics and economics over time.

There is a particularly prescient section in which he explains why Russia’s annexation of Crimea was all but inevitable following the ousting of Ukraine’s President Yanukovych in 2014. The rest, as they say, is history.

It is entirely natural that in many parts of the world national boundaries are determined by physical geography, as the landscape has brought peoples together or kept them apart. Moreover, it is when national or other borders are imposed more arbitrarily, often by distant imperial powers, that conflicts often ensue.

It follows from this that the world of business, and consequently fund management, will often seek to follow such geographic divisions too.

Investors are frequently offered investments whose mandate is predicated on geography. They might be presented with a range of funds with descriptors such as “North American” (hands up if you even think about Canada when you see this!), “Europe ex-UK”, “Asia-Pacific” or “Emerging Markets”.

The general assumption is that the fund manager will be primarily investing in companies whose stockmarket listing is in the geography in question.

But why? Is this logical? In an age when capital is entirely fluid and directors can choose where to list their companies regardless of where they actually do business, is the division of funds by geography useful?

Or is it actually an impediment to both fund managers delivering optimal performance and their investors understanding which companies they are buying? In other words, have fund managers and investors become prisoners of geography themselves?

Two examples may serve to illustrate my point…
• First, I have seen at least two quotes stating that the companies included in the FTSE100 derive over 70% of their revenues from overseas, so an investment in the FTSE100 is categorically not an investment in the UK economy.
• Similarly, the six largest companies in the US S&P 500 index, with a combined weighting of over 22% are: Apple, Microsoft, Amazon, Tesla, Alphabet A and Alphabet C. It would be hard to argue this represents a direct play on the US market given the globalised nature of these businesses.

It may, then, be the case that we see a continuing trend towards thematic and style-based funds that are not constrained by arbitrary geographical boundaries. The rise of interest in ‘ESG’ investing has undoubtedly served to accelerate this trend, and I think it is highly likely that demand for thematic and style-based funds will increase further over time.

Successful fund managers will be those that respond to this demand.